Business context and reporting period
Issuer identification: The supplied filing is Senior Housing Properties Trust (now identified in the request as Diversified Healthcare Trust), not a filing under the name Diversified Healthcare Trust. It is an unaudited Form 10-Q for the quarter ended September 30, 2013. Confirm the issuer and any name-change history before relying on this summary.
The REIT owned senior living communities, medical office buildings (MOBs) and wellness centers. At quarter-end, it reported 396 properties in 40 states and Washington, D.C.; its portfolio overview excludes properties classified in discontinued operations.
Financial performance and position
Amounts below are in millions of dollars unless stated otherwise. Q3 and nine-month periods are compared with the respective 2012 periods.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $187.3 | $156.1 | $561.1 | $443.1 |
| Operating income | $65.9 | $61.4 | $190.9 | $181.3 |
| Net income | $38.1 | $25.6 | $79.0 | $91.2 |
| Net income per share | $0.20 | $0.15 | $0.42 | $0.55 |
| FFO per share | $0.40 | $0.35 | $1.21 | $1.19 |
| Normalized FFO per share | $0.42 | $0.43 | $1.27 | $1.32 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $248.2 | $239.0 |
Q3 operating margin was approximately 35.2% versus 39.3%; net margin was approximately 20.4% versus 16.4%. Nine-month operating margin was approximately 34.0% versus 40.9%; net margin was approximately 14.1% versus 20.6%. These calculations use reported operating income and net income divided by revenue.
For the nine months, cash used in investing was $183.0 million, chiefly acquisitions and property improvements; cash used in financing was $55.3 million, including $215.6 million of shareholder distributions, partly offset by $261.8 million of net share issuance proceeds. Cash and equivalents were $52.3 million at September 30, 2013, up from $42.4 million at year-end 2012.
Total assets were $4.81 billion and shareholders’ equity was $2.78 billion. Balance-sheet debt comprised $125.0 million drawn on the revolver, $1.093 billion of senior notes (net of discount), and $703.1 million of secured debt and capital leases. The filing separately reports $684.6 million of mortgage principal and $13.4 million of capital leases. The $750 million revolving facility had $625 million available at quarter-end.
Quarterly distributions declared were $0.39 per share; nine-month distributions declared were $1.17 per share. Management reported covenant compliance at September 30, 2013.
Material changes versus prior comparable period
- Q3 revenue grew 20.0%, primarily because managed-community resident fees rose with acquisitions and communities transferred from triple-net leasing to managed operations. Nine-month revenue increased 26.6% on the same broad mix shift and acquisitions.
- Q3 net income rose, while nine-month net income fell 13.5%. The nine-month 2013 result included $27.9 million of impairment in discontinued operations, mainly for seven MOBs held for sale, and $5.7 million of other impairment charges. Nine-month 2012 included a $6.3 million debt-extinguishment loss, versus $0.8 million in 2013.
- Nine-month total NOI increased to $338.2 million from $318.0 million. However, comparable MOB NOI declined 4.6% for the nine months, reflecting lower occupancy and lease renewals at lower rents; comparable managed-community NOI increased 7.1%.
- Nine-month FFO increased, but Normalized FFO per share declined from $1.32 to $1.27. Share count increased following a January 2013 offering of 11.5 million shares, which raised approximately $262 million net of underwriting discounts and before expenses.
- The September 2013 revolver amendment extended stated maturity to January 2018, with a conditional one-year extension option, and reduced the borrowing spread and facility fee.
Outlook, commentary, risks and unusual items
- Management said operating cash flow and available liquidity were expected to fund operating costs, debt service and distributions for the next 12 months and foreseeable future. This is management’s expectation, not a quantified earnings forecast; no formal earnings guidance is provided in the supplied text.
- Nineteen properties were held for sale: 10 senior living communities, two rehabilitation hospitals and seven MOBs. The company recorded $32.3 million of impairments on 11 of them; their aggregate post-impairment book value was approximately $94.9 million. The company cautioned that sales may not occur on expected terms.
- The two rehabilitation hospitals were under an agreement to sell for $90 million, subject to adjustments, licensing and regulatory approvals, and other conditions. Management expected a possible closing by mid-2014, but gave no assurance it would close. If completed, Five Star’s annual rent under the affected lease would decline by $9.5 million.
- Five Star was the largest tenant: the filing attributed 44.1% of Q3 NOI and 41.2% of portfolio investment carrying value to Five Star leases. Aggregate rent coverage for its leases was 1.25x, versus 1.30x a year earlier. The filing warns that tenant financial or reimbursement pressures could affect rent payments.
- Healthcare reimbursement exposure includes Medicare sequestration reductions of 2% and state Medicaid rate constraints. The company stated approximately 94% of NOI came from properties where most NOI was derived from private resources, and 6% from properties principally dependent on Medicare or Medicaid.
- Related-party arrangements are significant: RMR provides management services, Five Star leases and manages properties, and affiliated parties have interests in AIC. The company disclosed a new RMR fee structure beginning in 2014, including 10% of base management fees payable in shares and incentive fees tied to shareholder returns.
- Other risks include interest-rate and refinancing exposure, lease renewals and occupancy, acquisition and sale contingencies, and potential conflicts of interest. A 100-basis-point increase would raise annual interest expense by about $1.25 million on the $125 million revolver balance then outstanding; a fully drawn facility would increase sensitivity materially.
Important facts for investors to verify
- Confirm that this Senior Housing Properties Trust 10-Q is the intended filing for Diversified Healthcare Trust and reconcile the issuer name and corporate history.
- Track completion, timing, proceeds and rent effects of the proposed hospital sale and the other held-for-sale property dispositions.
- Assess Five Star’s rent-paying capacity, lease coverage, financial condition and concentration in portfolio NOI.
- Review the drivers of the $27.9 million discontinued-operations impairment and whether further write-downs or sale losses could occur.
- Compare recurring cash generation and Normalized FFO with the $0.39 quarterly distribution, noting that FFO and Normalized FFO are non-GAAP measures and are not cash flow.
- Monitor leverage, mortgage maturities, revolver availability, covenant headroom and the cost of future capital; confirm subsequent developments after October 30, 2013.